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UTILITY WEEK | 21ST - 27TH JULY 2017 | 17 Policy & Regulation "Our PR19 challenge to water companies: think big and be ambitious." Ofwat's methodology for PR19 proves that it is serious about improving operational performance. W hen we launched our 2019 price review methodology consultation last week, we threw down the gauntlet for water companies. The water sector provides a truly vital public service which we simply could not do without. However, there's no denying the challenges we all face, from a growing population, to shis in customer behaviour, to environ- mental pressures and the continuing need for affordability. That's why in this review, we are asking water companies to think big and be ambitious in both what and how they deliver for customers, the environment and wider society, now and in the future. At the heart of our price review are four themes: customer service, resilience, affordability and innovation. We view each as fundamental to maintaining trust and confidence in water and waste water services among customers and wider society. In each one of these areas, we expect companies to stretch themselves through high-quality, T he operational performance of water companies has been a growing con- cern. There has been criticism of both the level of performance and the postcode lottery where customers receive different levels of service depending on where they live. It has also been very difficult to get the right information to compare performance across the sector. Ofwat responded, at the back-end of PR14, by providing a comparative assess- ment of five common performance commit- ments linked to upper quartile performance targets. Now it has stepped up that focus. The PR19 methodology consultation has made it clear that there will be higher expec- tations of company performance across 14 common operational and customer meas- ures. This will also make it possible, for the first time, to make meaningful comparisons between companies. Column Cathryn Ross Chief executive, Ofwat Column Richard Khaldi Water sector expert, PA Consulting Group ambitious and innovative business plans that deliver more of what matters to their customers. For companies that go the extra mile, there will be rewards – financial, procedural and reputational. Conversely, companies that fall short will find this a very tough review. Where it comes to customer service, there have been considerable improvements since privatisation. But water has lagged behind other sectors. We see no reason why this should continue to be the case. Water companies can learn from other sectors that have successfully harnessed a wide array of digital tools to become closer to the customer, to engage them in decisions about the product or service they receive and to better deliver against their diverse needs and expectations. Affordability remains an issue for many customers, not only those who have fallen into debt. That's why we'll be expecting to see bills that offer overall value for money However, companies need to understand that the prime reason behind the new meas- ures is to raise the operational performance of the sector, and that is going to be chal- lenging. Ofwat has underlined that it wants stretching targets on all 14 of the common performance commitments. On particularly key commitments – water quality compliance, water supply interrup- tions, internal sewer flooding, and pollu- tion incidents – it has gone a step further. It wants commitment levels for the entire period to meet at least the forecast level for upper quartile performance in 2024/25. There will also be no glide-path for any of the common performance commitments, so the stretching performance targets will have to be met from day one of AMP7. Add in plans for ambitious leakage targets to meet the challenge laid down by Defra in its dra strategic policy statement, and it is clear for customers. More broadly, we want to see companies going further than ever before to better understand and support those cus- tomers who find themselves, for whatever reason, in vulnerable circumstances. Long-term resilience in the round is something we've been talking about for quite some time. As we head into the next review period, we are asking water compa- nies to consider carefully whether they have in place the right people, infrastructure and processes, as well as robust finances and corporate structures to see them through the next control period and beyond. To deliver all of this, when financial returns are looking like they will be lower for longer, companies will need to be innova- tive. They will need to find new ways of doing things and embed those new ideas and processes into their businesses so that customers get more of what matters to them. This will be a challenging price review. In order to ensure that the water sector is well placed to meet the demographic, societal and environmental challenges that lie before us, we've set the bar high. We've made clear the kind of outcomes we are looking for and the direction we expect to see companies moving in, particularly with regard to their customers. We are confident, however, that the sector can and will rise to meet these challenges. We've seen real progress in recent years, but the years ahead will require the sector to shi the frontier further still. that Ofwat means business on improving operational performance. At its City briefing on the methodology, Ofwat made clear that PR19 will be tough on "average" companies and that those who find themselves at the bottom of the league on efficiency will be subject to particular scrutiny. They also highlighted that where Ofwat chooses to intervene through the price review process and adjust a company's PR19 performance commitments for not being stretching enough, that company will inevitably start AMP7 behind and incur more penalties under the ODI regime. This is because the ODI penalties themselves will also be more severe. Ofwat favours enhanced penalties on common perfor- mance commitments which will make the financial hit even bigger for those companies that don't deliver the requisite performance. Although the outlook for some compa- nies may seem bleak when it comes to meet- ing the operational challenges Ofwat is set- ting them, the good news is that their fates rest in their own hands. Companies can start today on developing a genuinely detailed, accurate and defensible understanding of their businesses. Richard Khaldi is a former director of Ofwat. His full opinion piece can be viewed at: http://bit.ly/2uB0KU9